چکیده انگلیسی

This paper hypothesizes that the special role of banks as corporate quasi-insiders has been changing due to developments in informational, legal and institutional infrastructures of syndicated loan markets. We investigate the integration of intermediated and disintermediated financial markets through highly leveraged transaction (HLT) syndicated loans during the 1990s. We demonstrate that, with the emergence of traded HLT syndicated loans as an alternative high-yield asset to high-yield bonds, market integration has dramatically increased. Taking the late 1980s and 1990s together, different factors explain the movement of credit spreads of the two markets. HLT loan market’s spreads are strongly affected by bank liquidity. Bank liquidity’s effect on HLT loan spreads disappears after 1993. From 1994–1999, junk bond market liquidity factors affect bank loan pricing. We interpret these changes as evidence of the erosion of bank specialness.

مقدمه انگلیسی

The banking literature commonly characterizes loans as illiquid assets. The lender is assumed to possess relationship-specific skills and/or information that preclude the efficient trading of loans in secondary markets where they would compete with public securities. This characterization helps us to understand the nature of banking, yet it is a simplification of reality. Loans have never been absolutely illiquid. Correspondent banks traditionally have been able to effect portfolio re-balancing by exchanging assets as long as the relationship between buyer and seller was strong enough to generate sufficient trust to mitigate informational asymmetries between them. Loan sales by bankruptcy trustees have long been a part of winding up failed banks. The marketability of bank loans, then, is a question of degree. Today, that degree is rapidly increasing.
Banking is an information industry so it is not surprising that the 1990s revolution in information technology fundamentally affected banking. At the strategic level, leaders of the top banks around the world are unanimous that their models of business are undergoing substantial change.1 Secondary market loan trading has also developed radically. Legal changes set the stage for standardization of loan trading and a rapid rise in trading volumes. The Loan Syndication and Trading Association has been set up to facilitate this process. Bond rating agencies are now rating syndicated loans.
Given these changes, the financial academic’s question, “why are banks special?” perhaps should be rephrased. In a recent article, Bossone (2001) asks, “Are transaction costs and information asymmetries being so dramatically reduced in modern financial systems that what was once special about issuing liquid liabilities and financing illiquid assets is hardly special at all, today?” Bossone answers his question from his theoretical analysis in the negative.
We hypothesize that the special role of banks as corporate quasi-insiders has been changing due to developments in informational, legal and institutional infrastructures of syndicated loan markets. We take an empirical approach, focusing on one banking service: syndicated lending. We ask the question, “are syndicated loans special and, if they are, is that specialness being eroded?” We answer this question by examining the degree to which the pricing of loans that are traded on the secondary market is integrated with the pricing of bonds.
We study highly leveraged transaction syndicated loans (HLTs)2 and compare their pricing to the pricing of high-yield bonds from January 1987 to December 1999. We build on the work of Angbazo et al. (1998) by estimating a model of the promised spread of HLTs above treasuries and comparing it to an estimated model of the yield spread of high-yield bonds above treasuries. We describe how the degree of segmentation between bank and bond markets has been severely eroded over the last decade. We show that from 1987 to 1993 an excess (lack) of liquidity in bank markets leads to price falls (rises) in HLT spreads but that this effect disappears from the period 1994–1999. We show that bond market liquidity has no independent effect on HLT pricing in the earlier period but that in the later period increases (decreases) in junk bond market liquidity lead to increases (decreases) in HLT spreads. In summary, we find strong evidence that, in this important part of the lending market, bank specialness is indeed changing.
Our article is organized as follows. A brief introduction to the HLT market is found in Section 2. Section 3 is a review the literature on the specialness of banking and its relationship to syndicated lending. 4, 5 and 6 discuss our approach to measuring market integration, the data and our findings respectively. Section 7 concludes with a summary, a note concerning the degree to which our findings can be generalized to other banking services, a comment on similar findings in related studies and some suggestions for further research.

نتیجه گیری انگلیسی

Our findings broadly support the hypothesis that syndicated loan pricing has substantially changed in recent years. Increasingly, it is integrated with bond markets. Prior to 1993, bank liquidity affected loan spreads: the more money banks had, the less they charged their HLT borrowers. Following 1993, that relationship ended. Prior to 1993, flows of funds into junk bonds had no effect on HLT spreads. Since 1993, whenever mutual fund fixed income funds increased their junk bond purchases, the consequent cash outflows from of HLT lending have tended to increase HLT spreads. We take these findings to be empirical evidence that the pricing of these syndicated loans has moved beyond banks. HTLs are now priced relative to disintermediated securities markets where institutional investors are major players. We further take this to be evidence that moral hazard between buyer and seller in the HLT market is not a major factor. Our empirical findings corroborate the conjectures we formed from our brief history of the opening of trading in syndicated loans. Major regulatory, legal, structural and technological innovations have coincided to drive the secondary market trading of syndicated loans to unprecedented heights. This trend is a part of the restructuring of the traditional roles of banking, currently being debated in the literature.
We recognize, however, that our findings are limited. Particularly, we have focused on the HLT market, a market that represents 80% of trading in syndicated loans yet accounts for only 20% of syndications. Are our conclusions applicable to untraded syndicated loans and, more broadly still, to non-syndicated loans that make up the bulk of banks portfolios?
The reader will remember that HLTs have higher credit spreads than other syndicated loans. High spreads tend to reflect higher credit risk and higher credit risk uncertainty that may open the door to informational asymmetries and moral hazard. Hence, that portion of the syndicated loan market which one would believe a priori most likely to exhibit moral hazard is the one that we have demonstrated lacks such moral hazard. We suggest that, from the institutional buyers’ point of view, the thinner spreads of the non-HLT loans simply do not make these unfamiliar assets sufficiently attractive.
Of course, another explanation of the lack of trades in the non-HLT market is possible. Notwithstanding their lower spreads, non-HLT syndicated loans may exhibit substantial informational asymmetries between buyer and seller and the consequent agency costs may retain their strength simply because there are less returns available to the loan buyer to compensate for the expected costs of moral hazard. At present, the competing hypotheses are difficult to test because the pricing data required to test them are not available. In recent years, however, the rate of growth of par value investment grade debt trading has exceeded the rate of growth in distressed debt trading, suggesting that mainstream syndicated loans are increasingly traded. If this trend continues, the passage of time will make available sufficient data for more conclusive tests.
Syndication is practiced only on very large loans. Although large loans have attracted much attention in the theoretical literature – particularly with respect to the delegated monitoring role of banks – they represent a relatively minor part of most banks’ lending activities. Clearly the conclusions we reach in this study concerning the increased integration of bond and bank loan markets are not directly applicable to small, relatively homogeneous assets such as mortgages, personal finance loans, credit card loans, small business loans and auto loans and leases. Large portfolios of such small loans with stable statistical properties make up the bulk of bank assets. Recent studies (e.g., Thomas, 2001), however, find that securitization of such assets is reducing the specialness of bank lending in these assets as well. Bank lending to mid-market customers, on the other hand, generates assets that are too small to be syndicated but too large to be aggregated easily into portfolios eligible for securitizing. Although one would expect the traditional role of bank lender as quasi-insider to prevail here, Gorton and Pennacchi (1995) demonstrate there are considerable sales of commercial and industrial loans by a large money center bank that they study. The sold loans are not explicitly guaranteed and bear no evidence of carrying implicit guarantees by the selling bank. It seems that bank assets in addition to syndicated loans are experiencing the erosion, or at least a change in the nature of bank specialness.
We must exercise care concerning the implications for bank specialness even with respect to HLT loans. While bank roles are clearly changing – HLT loans are now priced in a larger non-bank market – we certainly cannot conclude from this change that bank specialness is on its way to extinction. We have argued, but have not proven, that declining informational asymmetries (coincident with legal, and regulatory change) have reduced banks’ roles as quasi-insiders. But our evidence is also consistent with the hypothesis that enlarging the market for HLT loans has broadened the role of banks as quasi-insiders and that banks are now certifying the quality of HLT loans to institutional investors whose demand for these higher yielding assets now affects those assets prices.25 We leave the task of determining which hypothesis is more valid must to future research.
Our paper’s findings suggest several additional research topics. The simple pricing model in Appendix A should be developed further if we are to more directly test market integration. Secondly, in investigating liquidity’s effects on parallel capital markets, it would be helpful to have a more compete specification of asset choices for the investor. By focusing on only the junk bonds alternative to the HLT loan market, and by using a mutual funds market proxy for the liquidity of junk bonds market, we have simplified our analytical task at the cost of ignoring the highly complex inter-market liquidity dynamics. Thirdly, bank liquidity and its management have changed substantially over the last two decades. Liquidity, as shown in the literature review, is at the heart of what makes banks special, yet our study has only casually touched on its nature, its effects on capital markets and its changing role in the economy.
Finally, we have shown that, over time, a distinctive class of assets – HLTs – has become integrated with capital markets while remaining a bank-originated asset class. We have not shown, however, that those loans are still “unique” in the sense that James (1987) used the term. James showed that the initiation or renewing of bank lending provided positive information to capital markets concerning the prospects of the borrower. He interpreted this empirical regularity as confirming the quasi-insider role of banks in markets characterized by informational asymmetries. It would be interesting to test HLT and other syndicated loans today to determine whether they preserve the ability to signal to capital markets the quality of borrowers.